An Analysis of Environmental Impairment Liability Issues

Environmental impairment liability (EIL) policies currently available in the market provide very broad coverage. Thus, an EIL policy may provide coverage for an insured’s owned site clean-up costs, off-site clean-up costs, third party claims for bodily injury or property damage, and business interruption costs. This paper will analyze some of the coverage and claim handling issues which may arise in connection with EIL policies.

Despite the breadth of the coverage typically afforded under EIL policies currently available in the market, there is one common limitation on coverage under the policies: they are typically claims-made policies, requiring the claim be submitted during the policy period or the extended reporting period (if applicable). The policy may also require the pollution condition be discovered or the underlying claim submitted during the policy period. Thus, there may be no coverage for a pollution condition which was not discovered during the policy period, where no claim was submitted during the policy period. It is critical to review carefully the language of the insuring agreement to determine the conditions for coverage of a pollution condition or claim.

A threshold issue to consider with respect to EIL policies is whether a “claim” has been submitted. EIL policies typically define “claim” to mean a written demand seeking a remedy and alleging liability on the part of the insured. Thus, requests for information and documents by the U.S. Environmental Protection agency or a state environmental authority do not constitute the requisite “claim.” On the other hand, the listing of a pollution site on the EPA national priority List has been held to constitute a claim.[1] Similarly, correspondence from the EPA identifying an insured as a potentially responsible party has been held to be a claim since it informed the policyholder of its potential liability.[2]

In Cargill Inc. v. Evanston Insurance Co.,[3] the court held letters from the Georgia Department of Natural Resources stating remedial investigations were to be conducted at the policyholder’s expense constituted a claim even though no demand was made for monetary damages or services where the letter explicitly stated remedial investigations were to be completed at the policyholder’s expense. On the other hand, in Central Illinois Public Service Co. v. American Empire Surplus Lines Insurance Co.,[4] the court held no claim triggering coverage was made where Illinois EPA communications with the policyholder did not include a demand until after expiration of the policy and extended discovery period.

An important coverage defense to consider upon receipt of a claim is whether the policyholder complied with the requirements regarding the prompt reporting of claims within the policy period or extended reporting period. Since the lateness of notice may not be apparent from documentation initially submitted by the policyholder, the insurer should submit requests for documents and information with respect to the insured’s first knowledge of the underlying claim.

In Hartford Fire Insurance Co. v. Guide Corp.,[5] the court held the notice was timely since no “claim” had been made at the time claimed by the insurers. The determination of what constitutes a “claim” is a double-edged sword. In the context of determining whether a claim was made within the policy period, the insured may argue for a broad construction of the term “claim.” On the other hand, the insured may argue for a narrower construction of the term “claim” in the context of determining whether notice of a “claim” was timely.

Most states hold the time within which notice of insurance claims must be provided is generally determined by an objective standard of reasonableness, rather than the insured’s subjective view.[6] Short delays in notice have been held to be late in some jurisdictions, such as New York.[7] On the other hand, substantial delays in providing notice have not defeated coverage in other jurisdictions. In Chemical Leaman Tank Lines Inc. v. Aetna Casualty & Surety Co., [8] the court (applying New Jersey law) held a four-year delay did not defeat coverage where there was no evidence that material information had been irretrievably lost and the insurer had no meritorious defenses against the underlying claims. The late notice defense may be waived if the defense is not asserted promptly and specifically.[9] The defense may also be waived if not asserted in the initial denial letter.[10] In most jurisdictions, the insurer must demonstrate prejudice to sustain a late notice defense. In Sanborn Plastics Corp. v. St. Paul Fire & Marine Insurance Co.,[11] the court (applying Ohio law) held the insurer must show prejudice to prove a late notice defense. An unreasonable delay in providing notice of a claim may be presumed to be prejudicial in the absence of contrary evidence.[12]

Historically, a showing of prejudice was not required to sustain a late notice defense under New York law. However, Insurance Law § 3420(a)(5) abrogated the no prejudice rule with respect to insurance policies issued after Jan. 17, 2009: “[F]ailure to give any notice … within the time prescribed therein shall not invalidate any claim made by the insured … unless the failure to provide timely notice has prejudiced the insurer…” With respect to a claims-made policy, however, “the policy may provide that the claim shall be made during the policy period, any renewal thereof, or any extended reporting period….” This statutory provision illustrates an important point. Even in jurisdictions requiring prejudice to sustain a late notice defense, no showing of prejudice is required if the insured’s delay in providing notice of a claim resulted in the failure to report the claim within the policy period or the extended reporting period (if applicable).

Even if prejudice is required to sustain a late notice defense, an insurer may still deny a claim based on late notice under certain circumstances. Under California law, an insurer may satisfy the prejudice requirement to sustain a late notice defense by showing "a substantial likelihood that, with timely notice, and notwithstanding a denial of coverage or reservation of rights, it would have settled the claim for less or taken steps that would have reduced or eliminated the insured's liability."[13]

The prejudice requirement can also be satisfied if the insurer is deprived of the opportunity for a meaningful investigation of the loss as a result of the late notice. The insurer satisfied the prejudice requirement set forth in the New York statute in Atlantic Casualty Insurance Co. v. Value Waterproofing Inc.[14] There the court held the insurer was prejudiced by a six-month delay in providing notice of a partially collapsed roof since the demolition occurred almost immediately after the collapse and the insurer was deprived of the opportunity to conduct a meaningful investigation of the loss.

Another coverage issue to consider with respect to an EIL policy is whether defense costs incurred by the insured prior to providing notice of the claim are covered. The question of whether pre-tender defense costs are covered by insurance policies varies by jurisdiction. Some jurisdictions require prejudice to support an insurer’s refusal to pay pre-tender defense costs while others do not.

Under New York law, coverage of an insured’s defense costs begins on the date when the insurer is first notified of the underlying claim regardless of prejudice because it is not until the insurer is provided with such notice that it can “investigate[] the matter ... and ... provide[] input into the ‘defense’ of the claim.”[15]

In jurisdictions where the policyholder has the right to select counsel to defend the underlying suit, another coverage issue to consider is the reasonableness and necessity of the defense costs (including both the reasonableness of the billing rates and the amount of time charged). The timely submission of reasonable billing guidelines by the insurer can be of assistance in controlling exorbitant defense costs.

EIL policies typically exclude coverage where there has been a change in the material use of the insured's own site during the period of insurance and which materially increases a risk covered under the policy. The key issue, of course, is whether the change in the material use actually increased the risk covered under the policy.

EIL policies typically include “other insurance” provisions which provide in substance the following:

If other valid and collectible insurance is available to any insured covering a loss, claim, or pollution condition, also covered by this Policy, other than a policy that is specifically written to apply in excess of this Policy, the insurance afforded by this Policy will apply in excess of and will not contribute with such other insurance.

Some claims for coverage under an EIL policy may involve pollution which purportedly commenced many years prior to the EIL policy period and which “occurred” during periods covered by commercial general liabilities policies without absolute pollution exclusions. Under these circumstances, the EIL insurer may argue that the coverage afforded under the EIL policies is excess to that provided under CGL policies. In RSR Corp. v. International Insurance Co.,[16] , for example, the court held an insurance company providing EIL coverage was entitled to a credit for settlements where the CGL policies covered the same claims over the same time period. In Shell Oil Co. v. Winterthur Swiss Insurance Co.,[17] the court held an EIL policy was excess to a CGL policy with a qualified pollution exclusion.

EIL policies typically exclude coverage for intentional acts. In addition, the fortuity and known loss defenses, which are available under occurrence-based policies, would also appear to be available to the insurer under a claims-made policy. The New York Court of Appeals described the lack of fortuity defense under accident and occurrence-based policies as follows in Consolidated Edison Co. of New York v. Allstate Insurance Co.,[18]:

Insurance policies generally require “fortuity” and thus implicitly exclude coverage for intended or expected harms. Insurance Law § 1101(a)(1) itself defines “insurance contract” as: “any agreement * * * whereby one party, the ‘insurer’, is obligated to confer benefit of pecuniary value upon another party, the ‘insured’, * * * dependent upon the happening of a fortuitous event * * *.” A “fortuitous event” is defined as: “[A]ny occurrence or failure to occur which is, or is assumed by the parties to be, to a substantial extent beyond the control of either party.” (§1101[a][2].

In National Union Fire Insurance Co. of Pittsburgh, PA. v. Stroh Companies Inc.,[19] the Second Circuit (applying New York law) stated that under the fortuity doctrine, “insurance is not available for losses that the policyholder knows of, planned, intended, or is aware are substantially certain to occur.” (quoting Barry R. Ostrager & Thomas R. Newman, Handbook on Insurance Coverage Disputes § 8.02, at 248 (5th ed.1991)) (boldface added). In Stroh, the Second Circuit stated the “known loss” defense is a “variation on the fortuity theme” and holds “an insured may not obtain insurance to cover a loss that is known before the policy takes effect.”[20] However, this doctrine does not preclude coverage for “known risks” even if the risk is “known to be high.”[21] Rules barring coverage for inter alia, the insured’s misrepresentations and fraudulent concealments, protect the insurer in these instances.[22]

EIL policies generally require the insured to complete an application form requiring the identification of pollution conditions which potentially can give rise to a claim. To the extent an insured fails to disclose such a condition which was known to it at the time it completed the application form, the insurer may deny coverage based on a policy exclusion for prior knowledge/failure to disclose in the application. A claim handler investigating a claim under an EIL policy should always review the application form carefully to determine if the requisite disclosures were made in the application.

As illustrated above, there are a host of coverage issues to consider when a claim is made under an EIL policy even though the scope of coverage under the policy is very broad.

Wm. Gerald McElroy Jr. is a senior partner with the Boston office of Zelle LLP. The author acknowledges with gratitude the research assistance for this paper provided by Jeffrey Gordon, an associate in the Boston office.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[9] The California Insurance Code provides an insurer that received untimely notice of a matter will waive any such coverage defense unless it promptly and specifically objects on that ground. Cal. Ins. Code § 554 (West).